How to Structure a Forecasting Problem

The way that you structure the problem will affect the forecasting method you need. This will vary by problem (e.g., to forecast which CEO will be most successful; to forecast the outcome of a conflict). As a start, we provide a guide for

Sales forecasting, with a chart describing components of the sales forecast, and a table describing possible methods for each component.

Select Forecasting Methods

How to select a forecasting method (PDF 8kb) â€“ A chart that helps in the selection of a method; details in Principles of Forecasting (2002) - abstract. If unsure about how to define your problem (e.g., judgmental or quantitative data), keep both branches open. It is likely that you will find that more than one method is relevant. If so, use combining (details on combining in Principles of Forecasting (2002)

Empirical Comparison of Forecasting Methods' Accuracy: The International Institute of Forecasters and Elsevier have made the special issue on the M3-competition available at a low price. This is the largest (3,003 time series) and most complete forecasting competition ever done. See details and order form. Commentary on the M3-Competition is also available.

Legal Aspects of Forecasting

The primary purposes of â€œStandards and Practicesâ€ are to help forecasters improve forecast accuracy, to better assess uncertainty, and to help decision makers to use the forecasts properly. They could also protect the forecaster. To our knowledge, no one has successfully sued a forecaster for making an incorrect forecast. However, some have successfully sued forecasters by showing that they did not adhere to best practice.

Beecham vs. Yankelovich illustrates some of the legal issues in forecasting. Beecham alleged that an inaccurate forecast for a new cold water detergent resulted in a $24 million loss. They claimed that Yankelovich used incorrect inputs to the forecasting models. In response, Yankelovich replied that Beecham failed to follow the marketing plan on which the forecasts were based because of changes in the advertising claims and reduced promotional expenses. This suit, which was settled out-of-court in September 1988, created much concern among research firms (Adweekâ€™s Marketing Week, December 7, 1987, pp. 1,4; Business Week, August 10, 1987, pp. 28).

An erroneous forecast of a severe drought in Yakima Valley in Washington caused farmers to undertake expensive actions with the cattle. The farmers took legal action against the U.S. Bureau of Reclamation to recover their losses. The government admitted making a mistake when they made an ill-advised subjective adjustment. However, it had been under no contractual agreement to provide a forecast. As a result, the court ruled against the farmers (Schinmann vs. U.S., 618 F. Supp. 1030, September 18, 1985), which was upheld by the appellate court (Schinmann vs. U.S., unpublished opinion, U.S. Court of Appeals for the Ninth Circuit).

In another case, four Massachusetts fishermen were lost at sea on November 21, 1980, because, their families claimed, of an incorrect weather forecast. Three families brought suit and won an initial judgment on the ground that the National Weather Service was negligent in failing to repair a weather buoy that could have provided useful data. The decision was overturned by the First U.S. Circuit Court of Appeals, and the U.S. Supreme Court refused to take the case (Brown vs. U.S., 599 F. Supp. 877, 1984, F.2d 199; 1st Cir., 1986). The issue was not the inaccurate forecast, but that the National Oceanic and Atmospheric Administration (NOAA) had failed to take reasonable steps to obtain accurate data. In addition, when it failed to obtain key information, NOAA did not notify users of this deficiency. The court ruled that there was no contractual requirement for the government to report on the process it used to make the forecast. Their ruling also implied that it is reasonable for forecasters to make tradeoffs between the cost of the forecast and its benefits. The reverse side of this is, if there is a contractual relationship, the forecaster should reveal the process.

In a British case, Esso Petroleum vs. Mardon (London, 1966 E. no. 2571), Mardon contracted with Esso to own and operate a gas station. A critical part of the negotiations was Essoâ€™s forecast that the station would sell 200,000 gallons of gas annually by the third year. Actual sales fell well short of the forecasted figure, and Mardon went out of business. Esso sued Mardon for unpaid bills. Mardon then countersued on the basis that the forecast misrepresented the situation. Esso had originally forecast the 200,000 gallon figure under the assumption that the gas pumps would face the road. After a zoning hearing, it had to change the stationâ€™s design so that the pumps were not visible from the road. Despite this unfavorable change, Esso used the original 200,000 gallon forecast in drawing up its contract with Mardon. Mardon won; the court concluded that Esso misrepresented the facts in this situation.

These cases imply that if you do not have a contract to provide forecasts, you are unlikely to be held liable. Furthermore, the courts recognize that forecasts involve uncertainty; making reasonable attempts to balance costs and benefits should provide forecasters with protection against lawsuits. Finally, forecasters can be held liable if it can be shown that they did not use reasonable practices to obtain forecasts, or if they intentionally used poor practices so as to bias the forecasts.

In addition to their use in legal cases, agreements on good standards of forecasting can be useful in auditing public projects. For example, does the government use adequate procedures to forecast the outcome of various projects for mass transportation, nuclear power plants, synthetic fuels, convention centers, and sports stadiums?

Essential Reading for the Practicing Forecaster

Foresight: The International Journal of Applied Forecasting

FORESIGHT's mission is to provide a forum for disseminating the practical implications of research and experience to the forecasting world, bringing insight and groundbreaking concepts to members of our profession.

Foresight topics

Design and Improvement of Forecasting Processes

Demand Management and S&OP

Forecasting Principles and Methods

Organizational Case Studies

Perspectives on the Role of the Forecaster

Tools: Books, Software, Data Sources

The World of Forecasting: Applications in Political, Climate, and Media Forecasting

Join the IIF, which includes a Foresight subscription and other benefits

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Get Help with Forecasting Problems

IIF Discussion Group: A listserve (automated internet mailing list) that allows practitioners to get advice from practitioners and academicians

Positions Available for Forecasters: Postings remain for six weeks unless action is taken to delete or extend. Contact This email address is being protected from spambots. You need JavaScript enabled to view it. with information on a job position. However, the primary listing of jobs in business firms is provided by the Institute of Business Forecasting.

Courses on Forecasting

Self-learning, self-certification courses on forecasting methods offered by forecastingprinciples.com. Complete the course and examination before looking at the answers.

Forecasting using Structured Analogies (Beta version - Please send This email address is being protected from spambots. You need JavaScript enabled to view it.your comments and suggestions)

Simulated interaction - a method for forecasting decisions in conflicts (Beta version - Please send This email address is being protected from spambots. You need JavaScript enabled to view it.your comments and suggestions)

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